2007 (5) TMI 351 - AT - Income Tax

Summary

Issues involved:

1. Deduction under section 80HHC for export of rough diamonds.
2. Treatment of interest income for the purpose of computing deduction under section 80HHC.
3. Depreciation on immovable properties not claimed by the appellant.

Issue-wise detailed analysis:

1. Deduction under section 80HHC for export of rough diamonds:

The primary issue was whether the export of rough diamonds qualifies for deduction under section 80HHC of the Income Tax Act. The assessee argued that rough diamonds are not minerals as per the exclusion in section 80HHC and should be considered processed minerals. The Assessing Officer and CIT(A) disagreed, treating rough diamonds as minerals not eligible for deduction, citing the decision in Classic Diamonds (I) Ltd. The Tribunal examined the definitions and legislative intent, concluding that rough diamonds are indeed minerals. The Twelfth Schedule specifies "Cut and polished minerals and rocks" as processed minerals, which does not include rough diamonds. Therefore, the Tribunal upheld the CIT(A)'s decision, confirming that rough diamonds do not qualify for deduction under section 80HHC.

2. Treatment of interest income for the purpose of computing deduction under section 80HHC:

The second issue was whether interest income received by the assessee should be treated as income from other sources or business income. The assessee contended that interest received from temporary loans should offset the interest paid on borrowings, reducing the overall interest burden. The Assessing Officer and CIT(A) treated the interest income as income from other sources. The Tribunal referred to the Bombay High Court's decision in Indo Swiss Jewels Ltd., which held that interest earned on short-term deposits made for business purposes is assessable as business income. The Tribunal remanded the case to the Assessing Officer to determine if the advances were made from interest-bearing loans set apart for business purposes. If so, the interest should be treated as business income and set off against interest payments. Otherwise, it should be taxed as income from other sources without set-off.

3. Depreciation on immovable properties not claimed by the appellant:

The final issue was whether depreciation on immovable properties should be deducted from business income even if not claimed by the assessee. The assessee argued against the reduction, but the Tribunal referred to the Special Bench decision in Vahid Paper Converters and the jurisdictional High Court's decision in Scoop Industries (P.) Ltd., which held that depreciation must be deducted regardless of the claim. Consequently, the Tribunal dismissed the assessee's appeal on this ground.

Conclusion:

The Tribunal dismissed the appeals regarding the deduction under section 80HHC for rough diamonds and the depreciation on immovable properties. However, it remanded the issue of interest income treatment to the Assessing Officer for further examination. Thus, the appeals were partly allowed.